Pentagon preps for economic warfare

The Pentagon sponsored a first-of-its-kind war game last month focused not on bullets and bombs — but on how hostile nations might seek to cripple the U.S. economy, a scenario made all the more real by the global financial crisis.

The two-day event near Ft. Meade, Maryland, had all the earmarks of a regular war game. Participants sat along a V-shaped set of desks beneath an enormous wall of video monitors displaying economic data, according to the accounts of three participants.

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“It felt a little bit like Dr. Strangelove,” one person who was at the previously undisclosed exercise told POLITICO.

But instead of military brass plotting America’s defense, it was hedge-fund managers, professors and executives from at least one investment bank, UBS – all invited by the Pentagon to play out global scenarios that could shift the balance of power between the world’s leading economies.

Their efforts were carefully observed and recorded by uniformed military officers and members of the U.S. intelligence community.

In the end, there was sobering news for the United States – the savviest economic warrior proved to be China, a growing economic power that strengthened its position the most over the course of the war-game.

The United States remained the world’s largest economy but significantly degraded its standing in a series of financial skirmishes with Russia, participants said.

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The war game demonstrated that in post-Sept. 11 world, the Pentagon is thinking about a wide range of threats to America’s position in the world, including some that could come far from the battlefield.

And it’s hardly science fiction. China recently shook the value of the dollar in global currency markets merely by questioning whether the recession put China’s $1 trillion in U.S. government bond holdings at risk – forcing President Barack Obama to issue a hasty defense of the dollar.

“This was an example of the changing nature of conflict,” said Paul Bracken, a professor and expert in private equity at the Yale School of Management who attended the sessions. “The purpose of the game is not really to predict the future, but to discover the issues you need to be thinking about.”

Several participants said the event had been in the planning stages well before the stock market crash of September, but the real-world market calamity was on the minds of many in the room. “It loomed large over what everybody was doing,” said Bracken.

“Why would the military care about global capital flows at all?” asked another person who was there. “Because as the global financial crisis plays out, there could be real world consequences, including failed states. We’ve already seen riots in the United Kingdom and the Balkans.”

The Office of the Secretary of Defense hosted the two-day event March 17 and 18 at the Warfare Analysis Laboratory in Laurel, MD. That facility, run by the Johns Hopkins University Applied Physics Laboratory, typically hosts military officials planning intricate combat scenarios.

A spokesperson for the Applied Physics Laboratory confirmed the event, and said it was the first purely economic war game the facility has hosted. All three participants said they had been told it was the first time the Pentagon hosted a purely economic war game. A Pentagon spokesman would say only that he was not aware of the exercise.